AIG - American International Group

[PlanMaestro]

Thanks MrB,  they are on track to make a couple of billions beyond the initial equity and accumulated interests out of ML III. FT on the story.

 

The New York Fed said in a statement on Friday that it decided to auction off two collateralised debt obligations, called the Triaxx CDOs, after “several strong reverse inquiries” from banks. The auction follows last week’s Fed sale of junk-rated Max CDOs, which were backed by commercial real estate mortgage bonds.

 

All of the Maiden Lane III CDOs were acquired by the New York Fed as part of the US government’s 2008 bailout of the insurer AIG. But the Triaxx CDOs are backed by subprime home loan bonds and have been the subject of a lawsuit filed by AIG. The New York Fed said that nine banks would be able to submit bids for the CDOs by Thursday. The banks are Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Nomura and Royal Bank of Scotland.

 

 

Fed Statement

http://www.newyorkfed.org/newsevents/news/markets/2012/an120504.html

 

[PlanMaestro]

For the actuaries out there, statutory statement. including new Schedule P disclosures and spreadsheet. Please share what you find!

 

http://www.aigcorporate.com/investors/statutorystatements.html

 

 

[Cardboard]

Well, this position kind of feel like BAC now. It trades significantly below book value and it looks cheap vs normalized earnings. Both large and high quality businesses. The problem for both is that these normalized earnings are not visible at the moment. It will take time for both to generate decent earnings on core operations or a solid return on equity. Until it becomes more visible, the stocks will likely thread water or stay quite a bit below book value.

 

The advantage of AIG over BAC is the possibility of significant value creation through share buy-backs. There is a mountain of available cash at the holdco and as assets continue being sold it will keep on growing while you have an irrational seller for the shares: U.S. government. There is also the possibility of Mr. Buffett wanting to take a stake in AIG shares which would give a tremendous seal of approval. Plus you don't have the litigation risk and as much regulatory risk.

 

Cardboard

[PlanMaestro]

Wow, weekly valuation of Maiden Lane III. Maybe it can be used to reverse engineer prices of securities sold?

 

http://www.federalreserve.gov/releases/h41/

 

And the annual report, including details of the instruments and the cash flow statement.

 

http://www.newyorkfed.org/aboutthefed/annual/annual11/ml3_fin_st11.pdf

 

 

[racemize]

I'm working on calculating BVPS changes on buybacks.  Since the current book value includes NOLs, is the calculation:

 

(Equity-Sale of Asset-35%*Sale of Asset)/new number of shares

 

?

 

Previously, they only mentioned IFLC as causing a loss in book value, but it seems like the above is true for dividends and AIA/MLIII.  Thoughts?

[PlanMaestro]

Have to run to pick up the kid, but here is the transcript

 

http://seekingalpha.com/article/561111-american-international-group-s-ceo-discusses-q1-2012-results-earnings-call-transcript

 

Our approach to capital management is fairly simple, be ready. We were opportunistic in our sales of AIA and Blackstone.

...

 

but first of all ML III is being sold by the Federal reserve and they go through the positions as they see fit and it’s up to the Federal Reserve to decide how they want to liquidate it. MAX was the biggest one in the portfolio and the most complex from our point of view, so it was – in our view it was a very successful sale and as we think about those sales we could also be a buyer. So for the insurance companies, if we saw some value in the sale of MAX and in fact we bought $600 million of the positions in the insurance companies as part of our investment portfolio.

 

So we don’t see anything that here at AIG that would represent a constraint on the Federal Reserve to sell ML III assets and to the extent we can get the price we think makes sense, we would be a buyer,

.....

 

We’re going to continue to look at our capital, look at our non-core assets, the selling of ILFC is not only about capital management, it’s about recognizing it’s a non-core business. It has a huge debt load and it’s a business that doesn’t fit in the insurance business and so we feel that that’s a business we would not be in. And to the extent it provides us a lot more capital, that’s great, because it helps us with capital management but it’s also about de-risking the company and that’s another aspect of it. So it’s in combination, we’re doing things that make the most sense for this company, it’s credit ratings and our future.

.....

 

Hancock:

Well, I think that there are some one-off items that make the recent short-term trend in the expense ratio inconsistent with what my longer-term trend expectation would be. So I would expect the expense ratio towards the end of the year to be between 32% and 33%. But to be honest, we are absolutely focused not on targeting a specific expense ratio. We’re really looking at the ROE and making the right trade-off between stable loss ratio improvement and whatever it takes to spend to get that in terms of infrastructure, distribution to get the best mix of sustainable business.

 

So, the infrastructure investments that are sort of heavy in nature are going to sort of peak in mid-2013. We have talked about that consistently over the last year, and the benefits from those will be long-term cost advantages and scalability of platforms through better shared services and so on. But importantly, I look at the large amount of expense that’s in claims that’s classified within the loss ratio and I really want to be agnostic about whether a cost is classified as loss ratio or expense ratio. I’m not trying to – given the huge variety of businesses that we have, benchmarking our expense ratio against others is very hard to do, and so the bottom line on a risk-adjusted basis is a much better way to judge whether we’re making progress and we feel very good about our ability to deliver the target ROE by 2015.

....

 

 

 

 

 

[sswan11]

Merrill Lynch raises price target to $44:

 

Price objective basis & risk

American International Group (AIG)

We arrive at our $44 price objective by using a sum-of-the-parts approach. The

company discloses the GAAP equity of its main operating units and we have

applied price/book multiples to arrive at valuations of these various units. Note

that the equity of both Chartis and SunAmerica are unlevered (debt is shown at

the corporate level). Accordingly, any price/book multiple we assign to the equity

of these units would be somewhat lower assuming these units were levered. In

addition, when we look at the projected ROE of these units based on our earnings

model, we must consider what that ROE would be on levered basis to compare

the return with other insurers. Risks to our price objective are: Further equity

offerings from the US government, additional reserve charges at Chartis, a failure

of SAFG to achieve top line growth, a downturn in the housing market, a change

at the CEO post, and higher aircraft impairments then we expect at ILFC.

[PlanMaestro]

Tic tac, tic tac

 

The U.S. Treasury Department said on Friday it has initiated a public offering of its common stock in AIG, the insurer the government bailed out in 2008 at the height of the financial crisis. AIG has said it intends to buy up to $2 billion of the stock sold in the offering, the Treasury Department said in a statement. The size and price of the offering are to be determined, the Treasury said in a statement.

[txlaw]

Tic tac, tic tac

 

The U.S. Treasury Department said on Friday it has initiated a public offering of its common stock in AIG, the insurer the government bailed out in 2008 at the height of the financial crisis. AIG has said it intends to buy up to $2 billion of the stock sold in the offering, the Treasury Department said in a statement. The size and price of the offering are to be determined, the Treasury said in a statement.

 

Beautiful.

[alertmeipp]

That would mean weakness until it's priced.

 

 

 

[txlaw]

That would mean weakness until it's priced.

 

Hopefully.

[PlanMaestro]

That would mean weakness until it's priced.

 

Let's hope so.

[alertmeipp]

That would mean weakness until it's priced.

 

Let's hope so.

 

I would love to buy some back too. :)

Hopefully, I won't run out of cash by then.

[mankap]

Hopefully it is priced at $29 .This will another opportunity to me to add to my AIG holding.

[Rabbitisrich]

 

Hancock:

Well, I think that there are some one-off items that make the recent short-term trend in the expense ratio inconsistent with what my longer-term trend expectation would be. So I would expect the expense ratio towards the end of the year to be between 32% and 33%. But to be honest, we are absolutely focused not on targeting a specific expense ratio. We’re really looking at the ROE and making the right trade-off between stable loss ratio improvement and whatever it takes to spend to get that in terms of infrastructure, distribution to get the best mix of sustainable business.

 

So, the infrastructure investments that are sort of heavy in nature are going to sort of peak in mid-2013. We have talked about that consistently over the last year, and the benefits from those will be long-term cost advantages and scalability of platforms through better shared services and so on. But importantly, I look at the large amount of expense that’s in claims that’s classified within the loss ratio and I really want to be agnostic about whether a cost is classified as loss ratio or expense ratio. I’m not trying to – given the huge variety of businesses that we have, benchmarking our expense ratio against others is very hard to do, and so the bottom line on a risk-adjusted basis is a much better way to judge whether we’re making progress and we feel very good about our ability to deliver the target ROE by 2015.

....

 

Strong communicators. Change the industry terminology and they could have been talking about BAC.

[treasurehunt]

I'm working on calculating BVPS changes on buybacks.  Since the current book value includes NOLs, is the calculation:

 

(Equity-Sale of Asset-35%*Sale of Asset)/new number of shares

 

?

 

Previously, they only mentioned IFLC as causing a loss in book value, but it seems like the above is true for dividends and AIA/MLIII.  Thoughts?

 

I am not sure I understand what you are saying here. Are you looking at the book value impact of a transaction where AIG sells assets and uses the proceeds to buy back stock? Shouldn't the equation be:

New BVPS = (Old Equity - Sale Proceeds - 35% * (Sale Proceeds - Cost Basis))/New Number of Shares?

 

Based on AIG's comments, it looks like ILFC has a cost basis of close to 0. I don't know if this is true of the MLIII assets, but I would guess not. Also, I don't see why paying out dividends would affect the tax asset.

 

 

[racemize]

What I'm talking about is the deferred tax assets that are on the books--when they have a sale that uses the NOLs, it eats into that book value in addition to the sale itself, so it's a bit of a double whammy.  Said another way, it's the loss of the asset from book + the loss of the used tax asset that is also on the book.  In the case of IFLC there is another 2.5 billion dollar cost (I think because the tax cost basis is low).  On the other hand, I think the taxes for AIA/MLIII have already been taken care of because of mark to market (not sure though) and dividends are presumably post tax (though it would seem the earnings would also eat into the DTA when they enter the books at the subsidiary level).

[treasurehunt]

What I'm talking about is the deferred tax assets that are on the books--when they have a sale that uses the NOLs, it eats into that book value in addition to the sale itself, so it's a bit of a double whammy.  Said another way, it's the loss of the asset from book + the loss of the used tax asset that is also on the book.  In the case of IFLC there is another 2.5 billion dollar cost (I think because the tax cost basis is low).  On the other hand, I think the taxes for AIA/MLIII have already been taken care of because of mark to market (not sure though) and dividends are presumably post tax (though it would seem the earnings would also eat into the DTA when they enter the books at the subsidiary level).

 

It would be nice if a tax expert on the board can clarify this. ILFC is on the books for 7.5 billion or so, yet the cost basis as far as taxes go is much less. The MLIII assets are on the books for 5.7 billion, although they are worth about 7.5 billion right now based on the NY Fed's latest weekly report. Does this mean that only the excess of the sale price over 5.7 billion will use up the deferred tax assets?

[Uccmal]

Racemize, I think you are correct.  It applies to ILFC, At least.  If they were to sell it at it's listed 7.5 b, say a gain of 4 b.  To offset that gain they would use some of the applicable NOLs, perhaps 1 B worth - 25% tax.  Simultaneously, the 1B disappears from the balance sheet at the same time as 7.5 billion, to be replaced by 7.5 b of cash. 

 

It's not really a double whammy but  BV would drop by 1 B.  Using the 7.5 Billion to buy in shares would make no difference to BV. 

 

I will stress that I am not a tax expert at all. 

 

I think the ML3 assets are unencumbered from a tax perspective, I think.

[finetrader]

For tax purposes, to compute taxable gain you will take the selling price minus the purchase price.

 

 

[racemize]

I'm also having trouble getting the exact number of shares outstanding. The average listed is 1.87 billion (in the latest quarter report), but later there is a 1.79 listed. I've also seen numbers as low as 1.68--it seems like it would be clearer, but perhaps I am just being stupid.

[PlanMaestro]

I'm also having trouble getting the exact number of shares outstanding. The average listed is 1.87 billion (in the latest quarter report), but later there is a 1.79 listed. I've also seen numbers as low as 1.68--it seems like it would be clearer, but perhaps I am just being stupid.

 

As of April 30, 2012, there were 1,794,014,435 shares outstanding of the registrant's common stock.

 

The difference with the weighted average 1,875,972,970 must the buybacks at the end of the period. It also seems that you are correct with the tax impact of the buybacks but I am no expert.

[alertmeipp]

AIG currently trades about ~0.6x book, many insurers are trading similar range or lower...what do u guys see relative to book AIG should trade?

 

 

[PlanMaestro]

I did a fast search in finviz and there are 79 stocks classified as P&C insurance. AIG was 70th out of the 79 in term in terms of P/B. The others that are "cheaper" are :

 

KFS: many on this board know the problems they've had. Also the stated BV is too aggressive

RDN: mortgage insurer, should not be included

HIG: The Hartford is also a life insurer having problems with variable annuities in the US and Japan. There is a  thread.

ANAT: don't know it well, but a superficial reading shows a too diversified insurance company with a variable annuity division.

NSEC: don't know it well, so i cannot explain their recent weakness. It has a Life division but seems standard.

SBX: workers compensation

MTG:  mortgage insurer, should not be included

ASI: specialty insurance and reinsurance

 

So, it is in the lower P/B decile, its peers in this decile have their problems, and AIG is not an average company.

[alertmeipp]

I did a fast search in finviz and there are 79 stocks classified as P&C insurance. AIG was 9th out of the 79 in term in terms of P/B. The others are:

 

KFS: many on this board know the problems they've had. Also the stated BV is too aggressive

RDN: mortgage insurer, should not be included

HIG: The Hartford is also a life insurer having problems with variable annuities in the US and Japan. There is a  thread.

ANAT: don't know it well, but a superficial reading shows a too diversified insurance company with a variable annuity division.

NSEC: don't know it well, so i cannot explain their recent weakness. It has a Life division but seems standard.

SBX: workers compensation

MTG:  mortgage insurer, should not be included

ASI: specialty insurance and reinsurance

 

So, it is in the lower P/B decile, its peers in this decile have their problems, and AIG is not an average company.

 

I hear you, but I think the problem is AIG is not purely a P&C - should we look at P&C, Aircraft leasing & Life insurance sector.

 

I agree it's cheap.. but how cheap? Are u guys seeing 0.8x $48 or 1.1x, etc...?